Chart of the week – Spreading cheer

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Signs of a somewhat brighter economic outlook and upbeat geopolitical (trade) news have caused the traditional safe havens for investors of German government bonds (Bunds) and gold to sell off, ending the “resistance” of these assets to the uptrend seen in equity, credit and emerging market debt markets so far in 2019.

  • Low Bund yields and higher gold prices had contrasted with surging equities and falling credit spreads
  • The relative strength of the Japanese yen since Q4 2018 had also been a signal of safe-haven demand persisting
  • Recently, gold and Bunds have finally capitulated

Risk-on sentiment appears to have become more widespread now that demand for Bunds and gold, asset classes that typically do well in times when risk-wary investors opt for safer investments, has recently fallen off. That shift in investor sentiment has caused benchmark 10-year Bund yields to rise and gold to lose much of the gains it had made since the start of the year (see Exhibit 1).

Exhibit 1: Gold and Bunds – traditional havens – have finally capitulated

Data as at 1 March 2019; source: FactSet, BNP Paribas Asset Management

The resilience in Bunds and gold ran counter to the gains in most major equity markets since the start of the year as they reversed the sharp losses sustained late in 2018, helped by renewed optimism about the outlook – economic momentum in Europe appears to be turning up, led by a bounce in German and French manufacturing sector expectations (albeit only off cyclical lows).

While in France, the gilets jaunes rallies continue, the economic impact of the anti-establishment protests appears to be falling, pulling the purchasing managers index (PMI) out of the tailspin seen in December 2018 and this January. With Italy’s PMI levelling out, it looks likely that for the eurozone as a whole, the weakness is about to end and expectations should improve from this point on.

Further support for risk appetite has come in the form of investor hopes that the US and China, the world’s largest economies, might be near a trade deal which might actually prevent further rounds of tariffs being imposed on yet more large parcels of goods or existing tariffs being raised further, and could even result in agreement on an easing of trade restrictions.

With Bunds and gold now also joining in the party, however, one would be tempted to sound a warning. When optimism becomes the consensus and many markets start moving just one way, leaving the safe havens, that could be a reason for caution. Only sheep all move in the same direction. There is still an all too familiar laundry list of investor cares and concerns providing external headwinds to economic activity. It includes weaker demand from Asia and China; a possible trade war with Europe; the uncertainty over Brexit; and weak demand in the car sector.


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Daniel Morris

Senior investment strategist, CFA charterholder

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